Share repurchases have been on the minds of investors and analysts alike since President Trump’s tax reform bill passed. Many companies are expected to use their savings and their ability to repatriate cash held overseas to buy back shares, and Apple Inc. (NASDAQ:AAPL) is certainly no exception. So just how high could the Apple stock buybacks go?
Apple stock buybacks could rise to 7%
UBS analyst Steven Milunovich said in a note this week that the annual rate of Apple stock buybacks tends to be at about 4% of shares, but he sees this metric rising as high as 7% or possibly even higher. According to him, Apple buys back approximately 5% of itself each year, but when it repatriates cash, this rate move higher, which he said should help in estimating the amount of Apple stock buybacks.
His analysis suggests that Apple could repatriate an extra $25 billion that could be used to repurchase shares. After adding that to Apple’s regular free cash flow, he estimates that the company could have about $122 billion available for stock buybacks through 2019, amounting to 14% of its market capitalization. Meanwhile, he estimates that the iPhone maker will be able to maintain $90 billion in net cash.
Estimating Apple’s target capital structure
Milunovich based his estimates on the capital structure Apple has followed relatively consistently after repatriating cash over the last five years. He estimates that the company targets a particular level of net cash “as if its foreign cash were brought back at a 25% rate.” That’s the statutory rate after subtracting foreign tax credits of about 10%. The result is an implied net cash position of about $90 billion to $100 billion.
He also explained that if Apple repatriates cash at a rate of 15.5%, another $24 billion in cash is freed up, keeping its net cash at $90 billion. However, if the iPhone maker targets only $60 billion for its net cash position, then the percentage of Apple stock buybacks completed over two years could increase from 14% to 18%, he added.
Apple stock buybacks could offer protection
The UBS analyst also warned that there could be volatility ahead for Apple stock due to “noise” originating from the supply chain and mixed data on iPhone demand, both of which are causing a great deal of uncertainty around Apple stock. Further, he noted that debates continue to swirl regarding how well the company can continue to perform as the iPhone business matures.
However, he feels that the possibility that Apple stock buybacks could reach 14% or more of the company with a net cash position of $90 billion should limit the downside risks for the shares.
Apple stock started Tuesday in a downward trend, falling by as much as 0.51% to $173.64 in morning trades.